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Tesco PLC

Company Profile

Publication Date: 13 Aug 2010

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Tesco PLC

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TABLE OF CONTENTS

TABLE OF CONTENTS

Company Overview..............................................................................................4
Key Facts...............................................................................................................4
SWOT Analysis.....................................................................................................5

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Tesco PLC
Company Overview

COMPANY OVERVIEW

Tesco ("the company") is one of UK’s leading food and grocery retailers. The company operates in
Europe, the US and Asia. Tesco is headquartered in Hertfordshire, the UK and employs about
472,000 people.

The company recorded revenues of £56,910 million ($90,445.4 million) during the financial year
ended February 2010 (FY2010), an increase of 5.6% over 2009. The operating profit of the company
was £3,457 million ($5,494.1 million) in FY2010, an increase of 9.1% over 2009. The net profit was
£2,327 million ($3,698.2 million) in FY2010, an increase of 9.1% over 2009.

KEY FACTS

Head Office Tesco PLC


New Tesco House
Delamare Road
Cheshunt
Hertfordshire
England EN8 9SL
GBR
Phone 44 1992 632 222
Fax
Web Address http://www.tescoplc.com
Revenue / turnover 56,910.0
(GBP Mn)
Financial Year End February
Employees 472,000
London Ticker TSCO

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SWOT Analysis

SWOT ANALYSIS

Tesco is one of the UK’s leading food and grocery retailers. The company operates in Europe, the
US and Asia. The company over the years built a sustainable business and customer strategy and
differentiated itself in a unique way with Clubcard, low prices and improvements to the customer
shopping trip which are likely to lead to permanent productivity gains. However, Tesco has been
losing customers across all segments except for the more affluent customers as the competition
intensifies. This will adversely impact the revenues for the company.

Strengths Weaknesses

Sustainable business model through High cost of growth in Central European


diversification and value orientation markets compared to competitors
Gaining market share in non-food The leading retailers win back the lost
categories — primary growth driver in the market share to discounters except Tesco
future
Retailing services — high margin
complementary business
High sales productivity in the UK facilitated
better than peers ROIC and profitability
Investments in IT led to operating
efficiencies

Opportunities Threats

Strong growth in South Korean, Chinese Non-food product lines are likely to be
and Indian markets provide long term adversely affected as the market is likely to
opportunities experience a low growth
Seamless integration of online channel in Intense competition affected the customer
line with the rising preference for the retention adversely
channel Restrictive legislations and strong lash out
Strong private label portfolio enables the from the communities is limiting expansion
company to effectively differentiate opportunities
Focus on fresh produce and convenience
store format in line with the changing
consumer preferences

Strengths

Sustainable business model through diversification and value orientation

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SWOT Analysis

Tesco is one of the leading retailers in the world and over the years aimed at building a sustainable
business model. Through diversification into new geographies, new product areas and new services,
the company is developing a business for the future as this model will be sustainable for years to
come. In 2000, Tesco was operating in markets representing 8% of global GDP and currently it
operates across the globe in countries which contribute 53% of the GDP. About 65% of Tesco’s
selling space is outside the UK. The company enjoys market leading position in many of the markets
outside the UK. While in 1997 Tesco’s international business generated 1.8% of profits and this
grew to 22% in 2010. Primarily, this strategy has given the business momentum to grow well through
the economic downturn. By continuing to invest through the recession, the company is well placed
to grow faster and improve shareholder returns as the global economic environment improves. Global
sourcing volumes have grown threefold in six years. Increasingly Tesco’s international businesses
are also utilizing the scale and skill of the Tesco Group with more international sourcing. Furthermore,
the company is replicating measures to gain market share on a global sale. Discount Brands are
now in seven markets, F&F clothing in ten countries, Clubcard introduced in seven countries with
more Clubcard holders internationally than in the UK. This is enabling sharing the global best practice
to the benefit of all the businesses to drive efficiencies and sales.

Another key factor that the company aimed at is building a sustainable business model through
value oriented retailing which is benefiting the customers and driving the footfall. Tesco introduced
Double Points through which the customers earned £550 million in total in vouchers. Double Points
has encouraged more customers to sign up for the Clubcard, which is now used with a higher
proportion of transactions than before and 18% more UK households are redeeming vouchers than
a year ago. This has aided the like-for-like sales growth partially by 150-200 basis points. Tesco
funded the majority of the investment in Clubcard program with cost savings and by wielding
efficiencies including £100 million ($158.9 million) in energy, £100 million ($158.9 million) in supply
chain productivity and another £100 million ($158.9 million) in store labor productivity. Although, the
company will not be able to fund higher investments in Double Points, nevertheless has gained the
Clubcard customer base. Through the recession Tesco also gained customers with lower priced
ranges such as Discount Brands and Market Value and have also offered affordable treats such as
the Finest Restaurant Collection ready meals, which have been very popular. The value oriented
trends that have emerged owing to the recession are expected to remain so in the short-term. These
trends although will manifest are most likely indicating a permanent shift in the consumer behavior.
Through the value oriented approach, Tesco is therefore driving the customer footfall which will
facilitate continuous customer acquisition even in a low growth environment.

The customer strategy is sustainable for the long term because Tesco can differentiate in a unique
way with Clubcard, low prices and improvements to the customer shopping trip and these are likely
to lead to permanent productivity gains.

Gaining market share in non-food categories — primary growth driver in the future

Tesco aims at being an international retailer vis-a-vis an international grocer and has been focusing
on non-food merchandise. The company was able to foray into the new product category effectively,
establish its presence strongly and has been expanding its market share aggressively across all the
categories. In electrical category, with competitive prices, a wide range and with over 1,000 Tesco

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Tech Support advisors in the UK stores to help customers make their choice, the company rapidly
grew its presence.Tesco now sells one in every six microwaves in the UK and one in four small-screen
TVs. The sales in electricals have doubled in the last four years and around 20% are through online
channel. The company has doubled its market share in games during 2009 as a result of allocating
it more space in-store, revamping the range and layout and being more competitive on new releases.
The company has been taking several measures to attain the competitive advantage compared to
the other retailers already present in the market. For example, Tesco teamed up with DreamWorks
studio for the exclusive rights to sell the short animated Christmas film Merry Madagascar. This
groundbreaking relationship was the first of its kind in the industry and enabled the company to sell
over one million Merry Madagascar DVDs. Furthermore, sales in toys have grown 25% in FY2010
with online sales up more than 60%; clothing sales grew by 7.3%, to reach £1billion ($1.5 billion) in
sales for the first time, helped by a 15% increase in children’s wear and the launch of the online
clothing range.

Going forward, non food categories will be the primary growth driver for Tesco and its increasing
market share in this segment will facilitate strong top-line growth. Also, the company has reached
a certain level of saturation in the UK markets. Tesco already reaches about 90% of the UK population
compared to Morrison and Sainsbury in the 60-70% range. Due to this, it is more difficult to grow in
the UK without cannibalizing sales. For Tesco to grow profitably it has become imminent that it has
to sell other stuff (non food and services) to existing customers rather than attracting many more
new customers, which is very difficult as it has limited customer base to capture.

Tesco enjoys several unique competitive advantages which will help the company quickly penetrate
the product category. Grocers have benefited from superior destination status and robust footfall in
the recession due to the needs-based nature of their core food offers and continued aggressive
space expansion. Also, the company offers lower pricing as it enjoys superior bargaining power. As
part of drive to lower prices for customers, Tesco tries cut out the middlemen and source products
from manufacturers or developers, which is possible given the size of the company. Furthermore,
the company is leveraging on the strength of its online channel to offer superior range. Tesco Direct
bridges the gap in range compared to the specialists with 12,500 products online, a non-food catalogue
and 240 in-store desks, boosting Tesco’s range authority in a number of non-food categories and
helping it to compensate for lack of a full non-food offer in locations where a Tesco Extra is not
present.

The company has been leveraging on its unique strengths as a leading grocer to improve its market
share in non-food product categories. It has an established presence aided by several proactive
measures. Non-food products will be primary growth drivers as the UK market reaches maturity and
will be key top-line driver for the company.

Retailing services — high margin complementary business

Tesco has increased focus on its retailing services business to drive incremental sales. As part of
these services, the company offers online retailing, banking, telecom and market research. Each of
these services are complementing each other and core retail operations. Through retailing services,
the company aims at quickly adjusting to the change in customer shopping patterns. Tesco leveraged

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SWOT Analysis

on its strengths of large customer base, brand, large store network, Clubcard data and access to
customer insights to build and grow its retailing services segment. Due to these factors, the customer
acquisition costs are low and the company has an opportunity to grow scale quickly. Tesco’s store
network provided it with servicing and distributing capability that is a unique competitive advantage.
Additionally, the access to customer insights enabled the company to develop customer centric
products and services. The services have been positively contributing to the profitability with higher
than average operating margins and yields. For instance during 2008–09, the operating margin and
Return on Capital Employed (ROCE) of the group was 6% and 13% respectively while that of retailing
services have been 13% and 19%. Apart from the fact that services are higher margin offerings, the
businesses are easily scalable as they are not restricted by the physical space. Additionally, the
company is using its existing store assets for all of its services business which is also contributing
positively to the margins.

The retailing services have complemented the core retail business in several ways. The Clubcard
program offers credit card which facilitates increased average spend. Tesco was also able to drive
footfall. For instance 46% of the Travel Money customers visited the store specifically to purchase
currency. Bank branches, phone Shops and catalogue Shops will be drivers to visit stores as well.
Tesco’s cost base was positively impacted by these services. For instance, Tesco pays over £100
million ($158.9 million) per year to banks as interchange fees for card transactions. The retailing
services facilitated about 15% of credit card transactions in Tesco stores on a Tesco Bank Credit
Card, therefore the company retains the interchange fees. According to the research conducted
internally by Tesco, customers who use two retailing services spend four times as much in store
than those who don’t use any Services and customers with a Tesco credit card spend about 30%
more with Tesco than customers who don’t have a Tesco credit card. Furthermore, customers with
two retailing services are 25% less likely to ‘lapse’ over a 12 month period than customers without
services. Lapse defined as customers who have dropped two or more share of spend categories
over a 12 month period. These insights clearly indicate that the retail services are adding value to
the core retail operations.

Integrated retail services offer a unique competitive advantage for Tesco and provide several
opportunities to cross sell. Customers increasingly are expecting an integrated, multi-channel offer
in which they can mix-and-match amongst delivery channels and ‘touch-points’ and the company’s
services provide these advantages. Tesco is expanding retailing services globally to leverage on
opportunities in other markets as well. These services will drive margins and also will contribute to
revenues incrementally.

High sales productivity in the UK facilitated better than peers ROIC and profitability

Tesco has been able to sustain high sales densities in the UK compared to its peers. In case of food
products the company’s sales density was over £23 ($36.6) while that of Sainsbury and Morrison
was just bordering on £21 ($33.4) during 2008–09. Through the competitors were able to close the
gap, Morrison still sells 10% less food compared to Tesco while Sainsbury sells 12.5% less. Higher
sales densities improve the profitability of the operations for the company’s stores.

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Sales densities are the main push for value creation and also the main push for competitiveness in
bidding for new sites. Sales productivity will enable Tesco to bid more for sites and sell groceries
for less. Due to the high sales densities despite being a capital intensive industry, Tesco has been
able to sustain a superior Return on Invested Capital (ROIC) in the UK at 17-18% pre-tax for many
years while other players were unable to even match their cost of capital. Sales productivity is
therefore an important driver of profitability and is a key competitive advantage.

High sales productivity coupled with the scale of Tesco has driven profitability over the years. The
earnings before interest taxes depreciation amortization and rent (EBITDAR) for Tesco has been
higher than its peers. EBITDAR margin for Tesco was 10.42% during 2008–09 and for Sainsbury
and Morrison it was 8.6% and 8.1% respectively. As a result of higher sales densities and higher
margins, Tesco has been able to consistently achieve higher returns than its peers.

The company has best in class sales densities, best in class margins and best in class ROIC in the
UK. The gap between the peers has narrowed in the last few years, but Tesco has been able to
sustain superior sales densities led by operational excellence. This will enable Tesco to weather
low footfall and sluggish consumer spending effectively in the current scenario and as the company’s
sales start improving, the bottom-line will be positively affected.

Investments in IT led to operating efficiencies

Tesco has focused on investments in information technology (IT) to optimize costs and enhance
performance. The company has invested heavily in IT over the years, and this has played a strong
role in improving sales, the supply chain, and efficiency. Tesco has in place an in-house designed
supply chain application; in 2009, the company made several improvements in stock management.
Tesco implemented more efficient ordering systems and introduced better in-store monitoring
processes, which helped to increase availability of products in stores and reduce warehouse stock.
These modifications will enable Tesco to cater to the requirements of the customers effectively while
optimizing inventory costs.

Tesco improved customer service by increasing investment in self-service checkouts which accounted
for a quarter of all its transactions by the end of 2009. Such measures ensure cost efficiency and
lead to less waiting lines for customers, which enhances their in-store experience. To further gain
on customer service arena, Tesco, has implemented customer relationship management (CRM)
system as well. To increase the convenience for customers, the company introduced an application
for iPhone which allows customers to store their Clubcard, the Tesco loyalty card, on their phone
and swipe it at the till instead of the card.

Also during 2009, the company rolled out another CRM solution. Tesco expects to vastly improve
the electronics division of the company, Tesco Digital, with the software-as-a-service tool being
implemented alongside its call centre workers to respond to queries and problems which crop up.
The system will be able to manage and log all customer interactions, with phone, email and online
messaging conversations all documented to gather relevant information about individual consumers
in order to relate to them. This will improve the customer service and also the customer experience.

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SWOT Analysis

Tesco achieved £550 million ($873.9 million) savings in 2009 in the UK under its Step Change
efficiency program, which involves IT improvements along with other general process efficiencies.
Tesco under the same program aims at higher savings in 2010 as part of its goal of saving £800
million ($1,271.2 million) in 2010/2011. These savings have boosted Tesco’s profits in the 52 weeks
ended 27 February 2010. The company’s group profit before tax for the period was 10.4% higher
than the same period in 2008–09.

Strong focus on IT has lead to increased efficiencies, higher savings which are converted in to higher
profits. Additionally, Tesco through investments in IT is enhancing the customer service. Retail
environment in advanced economies is mature and is characterized with intense competition. Gaining
efficiencies and savings through IT will be a key competitive advantage. Additionally, enhanced
customer service will enable Tesco to retain customers effectively.

Weaknesses

High cost of growth in Central European markets compared to competitors

Tesco operates a high capital intensive model in Central Europe which is placing it at a disadvantage
compared to the competitors. High capital compared to peers is leading to lower capital turnover
which is pressurizing the ROIC. A decline of ROIC is more of a concern as it is not affecting all the
players. Some players such as Biedronka in Poland and BIM in Turkey, the respective market leaders
have been able to sustain high ROIC even in tough economic circumstances. These companies
have continued to report very solid like-for-like sales and are expanding aggressively. Also, Colruyt
in Belgium can be taken as a comparison as it has a number of similarities with Tesco. It is a company
operating in a mature market whose business model is also freehold based (where the stores are
in freehold premises rather than in malls). It achieves similar sales densities to Tesco in the UK and
almost identical EBITDAR margins. Both companies have been growing sales organically by an
average of 9% over the last five years. However, this growth was achieved with a capex to sales
ratio of just 3.5% at Colruyt which compares with Tesco’s 7.4% capex/ sales ratio in the same period.
This indicates that Colruyt is yielding the same growth for lesser capital. Similarly, in Poland Tesco
has net invested capital of about four times more than Biedronka, at about E2 billion compared to
E0.5 billion and yet Biedronka's sales in 2009 amounted to E3.7 billion while Tesco’s sales were
estimated to be around E2.2 billion. A key factor explaining this is that Tesco owns most of the
freehold while Biedronka is 90% leasehold. Despite the different models, both the companies aim
at generating more profits out of capital spent and this profit is significantly higher at Biedronka.
Committing less capital allows a company to operate with a lower EBIT margin and still make a
satisfactory return. Lower build costs should also mean lower maintenance costs. Furthermore,
because of its limited range, Biedronka concentrates its purchasing power into fewer SKUs about
800 SKUs or E4.6 million ($6.4 million) sales per SKU in 2009 against Tesco which may sell 30,000
SKUs or E0.07 million ($0.1 million) per SKU.These figures further reiterate the fact that comparatively
Tesco is less profitable despite its size and other obvious advantages of a large hypermarket model.

While in the UK, most of Tesco’s competitors operate models that are equally capital intensive, with
the obvious exception of the discounters, in Central Europe, Tesco is more exposed to the capital

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SWOT Analysis

light competition from players like Biedronka in Poland, Lidl and Kaufland in several markets or BIM
in Turkey. The company’s international returns have scope for improvement as there are several
companies in the sector that operate lighter capex formats yet are more competitive. Overall, the
growth in Central Europe is costlier for Tesco limiting its opportunities.

The leading retailers win back the lost market share to discounters except Tesco

During the recession, all the four leading retailers in the UK have lost customers to discounters.
However, except for Tesco, the others gained back the market share leaving the company in a
disadvantageous position. The big four supermarkets have boosted their share once more to 83.5%
from 80.3%. Several factors like pricing, range enhancement, quality and store expansion led to this
recovery. However, among the big four, Morrison, Asda and Sainsbury all gained share but Tesco
lost 0.2 percentage points to 30.9%. The biggest gain came for Morrison, taking its share of main
users to 14.5% from 12.6%. Tesco’s 30.9% main user share is 2.1 percentage points off its peak of
two years previously and its 56.8% visitor penetration is 2.2 points off its peak of one year previously.
Tesco was unable to gain the lost market share which further deteriorated even if by a small
percentage. Despite its efforts to incorporate changes in line with the shift in consumer behavior,
the company trailed its competitors in gaining the market share.

Opportunities

Strong growth in South Korean, Chinese and Indian markets provide long term opportunities

Tesco’s business in Asian countries will benefit from the strong growth rates in these countries.
Asia’s retail sales are estimated to increase with China driving the growth. China's retail sales are
estimated to grow at 16% in 2010. China's retail sales rose 17.9% and stood at CNY2.5052 trillion
($366.9 billion) in January and February of 2010 according to latest figures released by the National
Bureau of Statistics (NBS). According to the IMF forecasts developing Asia is estimated to grow at
7% in 2010 compared to the growth rate of 0.6% in developed economies. Asia is further estimated
to lead the world in terms of growth rates. The growth in Korea is estimated to outpace the world in
2010 by growing at nearly 4%. The retail industry in India is large owing to large population and is
set to grow as several factors contribute. Industry reports forecast that total retail sales will grow
from INR16.3 trillion ($353.0 billion) in 2010 to INR25 trillion ($543.2 billion) by 2014. These growth
rates present strong opportunity for Tesco to expand in these regions.

The company has established itself in several of these countries and is deriving significant benefits.
Profits in Asia grew by 24% with margins strengthening significantly in the second half with 6.1%
compared to 4.3% in the first half. The company continued to invest through the downturn to ensure
that it will be in an even stronger position as the economies recover. In FY2010, Tesco opened 3.0
million square feet of new space across the region, an increase of more than 10% and the company
plans to open 4.9 million square feet in FY2011. Tesco also is focusing on developing a strong brand
in most of then Asian markets with further expansion of Clubcard and Retailing Services businesses.
In India, the company already has an exclusive franchise agreement with Trent, the retail arm of the

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SWOT Analysis

Tata Group. The company plans to open first cash and carry store by the end of 2010 in India further
strengthening its presence in the country.

Seamless integration of online channel in line with the rising preference for the channel

The online channel has been gaining popularity in the UK and customers expect to be able to shop
where and when they want. Tesco over the years has invested in the internet channel and it is one
of the most profitable online grocery retailers in the world. As the shopping habits change, the
customers want to buy online as well as from stores and catalogues and many will use a combination
of these to research before buying. With an integrated multichannel approach Tesco has broader
appeal for the customers, enabling them to shop whichever way they. In addition to the 15,500
products available online through Tesco Direct, the company also launched two new specialist
websites in October, for clothing and entertainment.

Online shopping is estimated to boom in the medium to long term. Online retail is set to experience
increased growth and reach £31.2 billion ($48.8 billion) by 2013, accounting for 10.0% of total retail
spending. In addition, the online channel has several counter recessionary characteristics as the
internet prices are cheaper due to decreased costs and customers find it a convenient alternative.
Tesco’s penetration into online retailing provides the company an opportunity to expand the
addressable market, address the customer needs effectively and also participate in the high growth
market.

Strong private label portfolio enables the company to effectively differentiate

The market trends suggest that the private label market is estimated to grow enabling Tesco to
leverage on its strong portfolio. Private label products have been gaining prominence as the customers
are trading down. The private labels target the value conscious customer base effectively as they
are cheaper than the national brands by 30%. Europe is the largest market for private label products
globally. Within Europe, the UK is the largest private label market by size, followed by Germany.
Private label penetration in the UK is close to 37% in 2010, and is forecast to exceed 40% by 2011.

Tesco continues to innovate in the private label segment with over 2,600 new or improved food lines
launched just in 2010. The company follows a good, better and best ranges across the private label
category. Due to this, Tesco was able to sell effectively to price sensitive customer base. However,
as the economy starts to emerge from recession customers are likely to switch over to the premium
range. Private label brands increase the loyalty of the customers and are the key differentiators.
They also are the higher margin products for the retailers. Tesco extended the private label innovation
to the electricals and has been able to appeal to the customer base. The company’s Tecknika brand
is the fifth biggest selling TV brand in the UK. This indicates that customers are increasingly accepting
the private label across the product categories. This enables Tesco to carve a niche in the market
and effectively differentiate itself. The focus on private label brands enabled the company to establish
a strong presence in some of the fast growing markets amid the adverse economic conditions. This
will help Tesco to improve the revenues and margins and to create a competitive advantage.

Focus on fresh produce and convenience store format in line with the changing consumer preferences

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SWOT Analysis

The consumer behavior has witnessed a shift in the recent times. In the recent times, the trend of
eating at home has emerged and more and more customers in the UK are preferring to cook at
home from the scratch. Furthermore, the health and nutrition concerns are also the likely drivers of
the trend. Entertaining at home is catching up also because the customers are more value conscious
and are reducing spending. Owing to such behavioral patterns, according to Verdict (Datamonitor’s
research arm), the fruit and vegetables are estimated to record highest CAGR of 24.6% among the
food products. There will be an increased demand for locally sourced fruit and vegetables, with
shoppers willing to pay premium for such products.

Tesco has been one of the largest food retailers in the UK and already enjoys significant benefits
with an established customer base. The company has increased the focus on fresh food and its
quality. Improved technical standards, additional specialist staff training, closer relationships with
the suppliers and significant changes to merchandising strategy of some key products are helping
to deliver a stronger range and better shopping experience for customers. These and other initiatives
enabled the company win the ‘Fresh Produce Retailer of the Year’ Award in 2009. Quality fresh
produce has gained prominence during the recessionary environment as the customers are
increasingly eating at home as well. Tesco is aiming at increasing the proportion of local produce
to improve quality. The focus on fresh produce will impact the sales positively.

The company has also over the past ten years built a store portfolio of convenience formats, which
has been appealing to the customers. Tesco has been opening smaller format and convenience
stores over the past 10 years to tap the trend for more local shopping. The company is targeting this
trend and estimates a potential for another 1,000 Tesco Express shops. Tesco has a network of
2,482 shops and just 455 of those are superstores. It has over 1,100 Tesco Express and 181 Metro
shops, both of which are local convenience stores. The smaller formats have been a key growth
area for Tesco over the past several years as the trends in British grocery shopping have changed
dramatically. There has been a significant swing away from huge, out-of-town supermarkets and
towards more local shopping and Tesco has responded to that.

Customers are using local shops more frequently to top up their shopping with fresh produce or
"food for now". This means that high street or local presence is becoming much more important for
food retailers. As a result of this the convenience store market is now outpacing the growth of the
UK general grocery market. According to the recent media reports, the UK convenience market was
worth £30.9 billion ($49.1 billion) in June 2010 and is forecasting it will reach £41.3 billion ($65.6
billion) by 2015. Tesco moved into the convenience store market early when it bought 1,200 T&S
Stores in 2002, which has given it an advantage against competitors like Asda who have no presence
in these markets. These store formats effectively address the increasing popularity of convenience
stores. These stores also allocate high proportion of floor space to the food. Tesco’s focus on fresh
produce and other food products in its other formats will also drive footfall.

Threats

Intense competition affected customer retention adversely

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Tesco in the times of economic downturn has been losing the customer base. Lower prices and
sharper promotions are maintaining Tesco’s appeal to a broad customer base and driving robust
sales growth. However, for the second time in seven years, the company has lost main user share.
While the previous fall was prominent among Abs (High income class customers), this time it is
among C1, C2, D and Es (lower income class customers). These customer categories are highly
price sensitive and have been easy targets for the discounters and other cheaper alternatives to
Tesco. Key rivals have taken a more aggressive stance on price and enhanced their private label
ranges. Tesco has gained share of ABs, testament to the retailer’s clear value focused proposition
and diverse store format that caters for a broad range of shopping trips. The company’s direct
competitors Asda and Morrison continue to make efforts to gain market share and Waitrose at the
premium end of the market picking up share on the back of aggressive space expansion and the
introduction of its Essentials range. Competition has intensified dramatically and consumers are
shopping around. With price becoming a more influential factor, key rivals taking a more aggressive
stance on price and enhancing their private label ranges, the group of price sensitive shoppers were
enticed to seek out cheaper alternatives to Tesco. Tesco has lost main user share and visitor
penetration in all socio-economic segments except ABs. Although the company is still ahead of the
field, but the market is showing signs of a hard battle to defend itself against formidable competition
from a position of saturation. Tesco has worked hard to retain and attract customers through its
loyalty scheme, price-led proposition, consistent value message and enhanced value ranges –
including the Discounter range. All these efforts have not paid back and Discounter brand breeds
confusion among the shoppers indicating that the proposition is not clear. Though the launch of its
Discounter range has reduced the exodus of shoppers to hard discounters, it has impacted sales
as shoppers have traded down to the new items. The addition of the new range has also made its
once simple range architecture complex, making the entire offer more expensive for a large proportion
of shoppers. Moreover, its once clear brand and marketing image has been confused by the Britain’s
Biggest Discounter message.

Furthermore, the company has built hypermarket model in the Europe, which has been registering
weakness in the recent times. The factors that have contributed to the increase in convenience
model have been pressurizing the sales in hypermarkets. Against the backdrop of challenging trading
conditions, hypermarkets with high focus on non-food sales have suffered. Hypermarkets have
suffered a significant drop in footfall as consumers cut back on discretionary expenditure and tighten
their spending. According to the findings of a survey conducted by Datamonitor, for most consumers,
a revamped neighborhood store is easier and more convenient to reach than an out-of-town
hypermarket. Also, a growing number of single person households means that more people will be
shopping for one, and the propensity for a large weekly shop at an out of town hypermarket will
decline. Furthermore, the convenience of ordering online and having it delivered is also growing
threat hypermarkets or supermarkets. Considering all the factors industry reports suggest market
saturation in most Western European countries is nearing. The major hypermarket companies are
restricted from pursuing organic growth in their home markets due to governmental restrictions on
land development. Although the degree of influence varies across the continent, the trend that saw
shoppers going outside of local high streets for their shopping has, to an extent, been arrested. The
changing demographics and the economic environment has led to structural decline in traffic in to
hypermarkets. Another format that has been benefitting a lot in recent times have been the
discounters. In most of the markets in Europe the top retailers have been the discounters. In Germany,

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discounters account for over 40% of the food sold in the country. In Poland or Turkey, the market
leaders are limited range discounters.

Another competition that is brewing up is the foray of Amazon into online grocery market. Amazon
is a leading online retailer and has best in class distribution and marketing, access to suppliers of
all sorts of specialty items and the experience of dealing with 160 million customers worldwide.
Although Tesco is a leading retailer in the food products segment and Amazon has little experience,
it has been observed over the years that in the online retail market, whether companies stand or fall
on the quality of their technology and logistics. In that context, Amazon can be a formidable competitor.
Already, electricals, books, music — all non-food key areas for Tesco — are exactly the product
ranges in which Amazon excels. The launch of groceries may also threaten the power that Britain's
supermarkets have over product suppliers. There were some clear hints from several product
producers large and small that their support for Amazon's launch reflects some frustration over the
way in which they have been treated by the grocery sector over the years. While in the UK Tesco
has been losing customers amid intense competition, the other markets have been witnessing a
weakness in the hypermarket model. These factors have made customer retention a primary concern
for the company. Despite the loyalty schemes, the factors may adversely affect the market share of
Tesco.

Restrictive legislations and strong lash out from the communities is limiting expansion opportunities

Construction of the huge format retail park stores that the likes of Tesco have favored over the past
decade is now beginning to slow, due to the limitations imposed by various different planning
restrictions. This includes the various difficulties of obtaining A1 food retailing clearance a particularly
significant factor. In February 2008 the UK’s Competition Commission (CC) recommended a
competition test to prevent firms with a strong presence in an area from building new stores or making
major extensions to their outlets. Retailers will only pass the test if they are new to the area, or if
there are four or more different supermarkets in a 10- minute drive of the proposed site. Where there
are three or fewer grocers in the area, the application will only be approved if it does not then account
for more than 60% of total retail space. These restrictions are likely to force grocers place a greater
focus on smaller neighborhood and high street stores, which will have less space available to allocate
to non-food. This leaves Tesco with a choice of opening stand alone stores for its non-food related
merchandise which limits leveraging on its strong customer base. However, Tesco has not yet
perfected the format, the main issue being their inability to create suitably aspirational store
environments. Instead they have attempted to replicate the same model they use in food stores –
but without footfall driving grocery products. This has proved insufficient to entice shoppers.

Furthermore, the company has been witnessing severe lash out from the local communities in the
recent times. This is lengthening the process of opening new stores and also is tarnishing the goodwill
of the company among these communities. In August 2010, a planning condition forced the company
to pay for marketing initiatives, road improvements, a bus service, community woodland and gateway
feature for the entrance to the fishing town. Tesco has channeled more than £400,000 ($635,708)
into a Moray town centre to mitigate the impact of its new £10 million ($15.9 million) store. Several
business men across the town center have criticized Tesco and said the contribution was not
substantial enough. These factors have been stalling the quick store opening plans and the company

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is also forced to pay a large sum of money. In another instance, campaigners fighting to prevent
Tesco building a £40 million ($63.6 million) superstore at Whitby, North Yorkshire were successful
as the planning commission refused to grant permission. Almost 4,000 people had signed a petition
objecting to Tesco developing land owned by a group of nuns. Tesco has submitted an application
for a new shop in Glastonbury to Mendip District Council and opposition to the store started to heat
up in July 2010. A Facebook group called "No to Tesco in Glastonbury" has already attracted 135
members and on Tuesday morning, residents were in the high street with a petition asking people
to oppose the plans. During the same month, plans to build a supermarket in Tenbury have failed
to gain the support of planning officers as Tesco wanted to build a 15,000 square feet store on the
town’s former cattle market. Apart from the regulations, the resistance from local communities is
stalling the expansion plans for Tesco. Availability of land has been an issue and there has been a
severe backlash partly because the company is resorting to development in lands owned by local
citizens. These factors are severely restricting the expansion opportunities for Tesco.

Non-food product lines are likely to be adversely affected as the market is likely to experience a low
growth

The UK retail market is expected to witness low growth rates in the short term. The market contracted
by 0.4% in 2009 and in 2010 a marginal growth of 1.3% is estimated. Non-food retail is estimated
to suffer a contraction of 1.8% in first quarter of 2010 and will return to positive growth only by fourth
quarter of 2010. The trend is expected to continue till 2013 and the markets are predicted to up to
3% till 2013. Low growth markets not only shrink revenues and sales for Tesco, but the competition
will further intensify as several players will compete for a small market growth. The scenario will
have an adverse impact on the expansion plans of the company as it has in recent times concentrated
on non-food products as primary growth driver.

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